In a proportionate liquidating distribution, WYX Partnership distributes to partner William cash of $40,000, cash basis accounts receivable (basis of $0, fair market value of $10,000), and land (basis of $30,000, fair market value of $50,000). William’s basis was $80,000 before the distribution. On the liquidation, William recognizes a $20,000 gain, and he takes a basis of $10,000 in the accounts receivable and $50,000 in the land.

Question

Answer the following statement true (T) or false (F)

Answer 1

False

Rationale: William recognizes no gain or loss because the distributed cash was less than his basis in his partnership interest. He takes a carryover basis of $0 in the accounts receivable. William’s basis in the land is limited to his $40,000 basis in the partnership interest after the cash and accounts receivable distributions. William’s $80,000 basis is first reduced by the cash distribution to $40,000. Next, the accounts receivable take a $0 carryover basis and William’s basis in the partnership interest remains at $40,000. Because this is a liquidating distribution (and because the land is not a "hot asset"), the basis in the land equals William’s remaining $40,000 basis in his partnership interest.